Ethical Drug Company’s Stock Is No Good

by Sam Collins | August 16, 2012 1:36 am

Forest Laboratories (NYSE:FRX[1]) — This developer of branded and generic ethical drug products is expected to have a 30% decline in revenues in FY 2013 (ended in March). This is due to the expiration of patent protection on a key drug thatForest manufactures. Even though the company has other drugs that may partially fill the gap in sales, earnings are expected to fall to 68 cents in FY 2013 from $3.57 in FY 2012.

The technical outlook is poor with the stock forming a bearish horn over the past six months. On Wednesday, FRX fell away from its 50-day moving average and flashed a sell signal from our internal indicator, the Collins-Bollinger Reversal (CBR). The stochastic fast line (red) has hooked down and will probably flash a sell within several bars.

Shareholders should sell FRX, and traders could short it at $34 or higher with a target of the mid to high 20s. Short-selling is a speculative technique that is riskier than long investments. A stop-loss order should be entered to protect against unlimited risk. Check with your broker for any margin requirements.